Wage growth continues

Wage growth slowdown has yet to be observed in the Latvian economy. The latest data indicate that the average gross monthly wage for full-time work in the third quarter of 2015 rose by 7.3% year-on-year. As consumer prices dropped by 0.1% year-on-year and the tax burden on labour income was reduced, the purchasing power of average wage (i.e., real net wage) increased by 8.3%. That bolstered private consumption dynamic under the conditions of weak external demand.

The leading role in the rise in compensation is still played by the private sector where the average gross nominal wage grew by 8.3%, compared to 5.4% in the public sector.

The gap between wages and productivity is widening, yet other macroeconomic indicators still do not indicate any deviation from macroeconomic balance or any competitiveness problems. The evaluation of labour shortages remains stably moderate (European Commission survey data), unemployment is close to its natural level. Latvia's export share in global imports and profitability of Latvian companies are likewise stable.

Wage growth is expected to abate next year. Minimum wage in 2016 will rise by a mere 10 euro, compared to the 40 euro increases in 2014 and 2015. Moreover, consumer prices will rise slightly; tax burden on labour income will no longer decrease. Thus the slowdown in net real wage will be faster than in gross nominal wage and labour income will not support private consumption to the extent seen recently. That should highlight the significance of external demand and competitiveness issues in economic development.